Arla Foods Consolidated Annual Report 2021

82 Arla Foods Consolidated Annual Report 2021 / Consolidated Financial Statements / Notes Net working capital 2.1 NET WORKING CAPITAL, OTHER RECEIVABLES AND CURRENT LIABILITIES Contents III Accounting policies Inventory Inventories are measured at the lower of cost or net realisable value, calculated on a first-in, first-out basis. The net realisable value is established taking into account inventory marketability and an estimate of the selling price, less completion costs and costs incurred to execute the sale. The cost of raw materials, consumables and commercial goods includes the purchase price plus delivery costs. The prepaid milk price to Arla's owners is used as the purchase price for owner milk. The cost of work in progress and manufactured goods also includes an appropriate share of production overheads, including depreciation, based on the normal operating capacity of the production facilities. Trade receivables Trade receivables are recognised at the invoiced amount less expected losses in accordance with the simplified approach for amounts considered irrecoverable (amortised cost). Expected losses are measured as the difference between the carrying amount and the present value of anticipated cash flows. Expected losses are assessed for major individual receivables or in groups at portfolio level, based on the receivables' age and maturity profile as well as historical records of losses. Calculated expected losses are adjusted for specific significant negative developments in geographical areas. Trade and other payables Trade payables are measured at amortised cost, which usually corresponds to the invoiced amounts. Other receivables and other current liabilities Other receivables and other current liabilities are measured at amortised cost usually corresponding to the nominal amount. ATA Uncertainties and estimates Inventory The group uses monthly standard costs to calculate inventory and revises all indirect production costs at least once a year. Standard costs are also revised if they deviate materially from the actual cost of the individual product. A key component in the standard cost calculation is the cost of raw milk from farmers. This is determined using the average prepaid milk price that matches the production date of inventory. Indirect production costs are calculated based on relevant assumptions with respect to capacity utilisation, production time and other factors. characterising the individual product. The assessment of the net realisable value requires judgement, particularly in relation to the estimate of the selling price of certain cheese stock with long maturities and bulk products to be sold on European or global commodity markets. Receivables Expected losses are based on a calculation, including several parameters, for example the number of days overdue adjusted for significant negative developments in certain geographical areas. The financial uncertainty associated with the provision for expected losses is usually considered to be limited. However, if a customer's ability to pay were to deteriorate in the future, further write-downs may be necessary. Customer-specific bonuses are calculated based on actual agreements with retailers; however, some uncertainty exists when estimating the exact amounts to be settled and the timing of these settlements. Finance programmes The classification of trade receivable finance programmes and supply chain finance programmes is subject to judgement. The utilisation of these programmes is recognised in net working capital.

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